21 Feb 2019 07:00
InnovaDerma PLC ("InnovaDerma", the "Company" or the "Group") Half Year Results for the six months ended 31 December 2018
InnovaDerma (LSE: IDP), a UK developer of beauty, personal care and life science products, is pleased to announce its unaudited half year results for the period ended 31 December 2018.
The Company continues to progress its strategy of bringing to market new product development, across multiple categories, which it believes will anchor the future earnings of the business. With numerous market activities and significant growth in the UK retail footprint, the Board remains confident of a strong second half.
Financial Highlights
Operational Highlights
Post-Period End and Outlook
Haris Chaudhry, Executive Chairman of InnovaDerma, said:
"We have overseen a period of significant adjustment to our DTC platform brought about by the changes within the social media platforms we advertise on. Having addressed those underlying factors, we have seen a quick response with a resulting increase in DTC revenues of 34% against the similar period last year. Our revised engagement strategy is delivering a marked improvement and we are therefore confident that the second half of the year will be disproportionally higher than in previous years. This view is also underpinned by Skinny Tan which will be on shelves in 1,305 Boots stores from mid-March to capitalise on the peak selling season. Together with Superdrug, our core brand will now be available in more than 2,000 stores in the UK. Roots is performing very well and will benefit from new product development in the second half of the year. We are making excellent progress across the business and we are confident for the future."
This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014
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About InnovaDerma:
InnovaDerma PLC (LSE: IDP) specializes in the research, manufacture and marketing of clinically proven products in life sciences, beauty and personal care products. InnovaDerma has presence in Europe, US, Australasia, Asia and Africa.
www.innovaderma.com Executive Chairman's Statement
Introduction
I am pleased to report another half year of progress for InnovaDerma, one which has seen significant new product development, product launches and entry into major new retail chains including Boots and Tesco.
Group revenues for the period declined marginally by 7%, primarily driven by the changes within Facebook's advertising algorithm which affected the DTC revenue during the period. The Company incurred a loss before tax of £0.42m (HY2017: £0.03m) as a result of reduced DTC sales and increased on-line marketing costs. Our flagship brand Skinny Tan continues to benefit from new product development and is expected to more than double its retail footprint this year, underpinning future growth. Roots, our in-house developed premium-haircare range which was launched in August 2017, performed strongly delivering revenue growth of 252% against the comparable half year. The brand is being expanded and new product lines will be introduced in the second half.
Charles & Lee delivered a 67% revenue growth on the same period last year and we are focused on new product development and expanding its retail footprint in the growing men's grooming and skincare market. Prolong has performed strongly and is making excellent progress. This, together with the launch of GrowLase, will augment the revenue of our Life Science division and the overall Group.
Our retail distribution will increase significantly this year and combined with the new DTC strategy and continued expansion across all brands through the introduction of exciting new product lines, we expect to deliver significant revenue growth for the financial year
Self-tanning
The Skinny Tan brand has continued to grow steadily in the UK high street retail channel with revenue increasing by 15% compared to the same period last year. The revenue growth was predominantly driven by Superdrug despite the cessation of the exclusive selling arrangement. The DTC channel conversely has seen sales soften driven by changes in the Facebook algorithm as detailed in the January trading update. This had the dual impact of diluting the impact of marketing activity and increasing the average acquisition cost of each sale. Despite this challenge, the online customer community has continued to grow which is now well in excess of 400,000 consumers. We implemented a new DTC strategy which encompasses complimentary channels such as Instagram, Google, Ad Roll and Taboola to provide us with depth and breadth of consumer engagement. The marked improvement in trading in recent weeks provides us with confidence that the strategy is effective and can be capitalised on.
Skinny Tan has already commenced selling in Boots Online and will appear instore from mid-March. The brand is due to be in 1,305 of Boots' stores and the launch is being backed by a comprehensive digital media, PR, merchandising and promotional program. This will be reinforced with a new, innovative and exclusive product which will add value to the brand and the category.
Superdrug has allocated 20% more shelving space to the tanning category for this season and Skinny Tan is looking to capitalise on this with an upweighted promotional program, special packs and the launch of an additional exclusive SKU.
New product development and innovation remains key to ensuring the Skinny Tan brand remains relevant and in pursuance of this, the Company has launched Protect & Glow, a range of sunscreens which provide a light bronzing effect in addition to sun protection. This is currently exclusive to our DTC channel and has received a strong positive response from our customer base. This is typical for the Skinny Tan model; we create awareness and demand in our DTC channel, then seek retail distribution to capitalise on the consumer interest. We will continue to make the brand relevant in the broader beauty category by delivering to a much larger target market with far less seasonality.
The international distribution of Skinny Tan continues to develop and we are in discussions with international retailers through our distributors in Canada. Although the self-tanning market is smaller in Europe than the UK, Skinny Tan has listings in significant retailers in Germany (Douglas) and France (Sephora). In South Africa, Skinny Tan has won 'Best Self Tanner' in the prestigious Women & Home magazine awards. The Company has also been working with the UK Department of International Trade to identify a strong distribution partner for the retail channel in the US market. A number of highly credentialed candidates have been identified and we expect to move into detailed commercial negotiations over the coming months.
Haircare
Roots has provided the Company with a premium brand within a very large category with global applicability. Product sales of £0.65m was up from £0.19m for the comparable period. This has been driven by the development of a strong retail footprint in Boots, Superdrug and Tesco.
Roots strengthened its retail position in the first half of this financial year with ranging in Tesco and completed the roll out of its first wave of new product development. This has now been established and the next set of new products are in the process of rolling out to meet the needs of specific hair types and consumers using hair colourants. This comprises the Curls shampoo and conditioner for the management of curly and wavy hair and Platinum shampoo and conditioner for bleached and light blond hair colours. The Company has already developed additional products to meet the needs of other hair types and colours to ensure it has a strong pipeline of innovation to bring to market.
In international markets, we are in discussion with a number of e-tailers for the US market and our Canadian distributor has secured ranging opportunities with major retailers. We are however, in the process of working through the commercial implications of high listing fees in the Canadian market.
Our Korean distributor is in negotiations to secure a launch on a major TV shopping channel. This route to market is very significant in Korea and has the potential to generate strong demand.
The new distributor for the Indian market is preparing for launch and we anticipate they will place opening orders later in the year
Cosmetic and Skincare
Charles + Lee has shown significant growth driven by new ranging and a highly successful Christmas gift pack promotion. The brand's revenue grew by 67% compared to the previous year and feedback from consumers has been very positive. We continue to develop the brand and focus on new product development. The Company has focused on the Australian market in the first instance and in Myer stores (Australia's largest department store chain). This strategy has proven to be effective and Charles + Lee sold out of the gift pack promotion well before Christmas. This has been followed up with repeat orders to replenish their fixtures indicating the brand is clearly building a loyal following. Charles + Lee will shortly be on shelves in Australia's largest beauty retailer Priceline in addition to Terry White Chemmart, a retail chain in Australia, giving the brand exposure to more than 400 stores in total. The brand launched in New Zealand before Christmas in 80 stores and performed well over the festive season.
Our Indian distributor is enthusiastic about the prospects for the brand in the rapidly growing Indian market and we expect to launch the brand in India in this half year. In addition, initial discussions are being held with UK retailers on the back of its success in Australia.
The Company has decided to continue to defer Stevie K Cosmetics' launch on DTC and retail until we are confident that a successful launch can be monetised and generate a suitable return on investment.
Life Sciences
Prolong, the world's only FDA-cleared medical device for premature ejaculation, was launched in the United States and Australia in May 2018. The launch was supported by a highly creative marketing campaign however the campaign was halted in July 18 owing to a switch defect in the initial manufactured inventory. This has now been resolved with a new manufacturer onboard and the Company has recommenced the marketing campaign.
The relevant regulatory approvals for Prolong are being finalised and once received, we expect to launch the device in UK and Europe this year. In addition, the Company expects to have the regulatory clearances necessary to sell the products in India and China this calendar year.
We are in discussions with various distributors to launch GrowLase (Headmaster), a wearable FDA-cleared helmet to aid hair generation and reduce hair loss. The Company is seeking to launch the product online, through retail channels and TV Home Shopping networks. It is expected that these initiatives will serve as the bedrock to layer up multiple new revenue channels as it gradually expands the geographical footprint for these devices into new markets globally.
Post-Period End and Outlook
The Company is executing on all its major planned initiatives and focussed on quality and consistency of delivery. Current trading is in line with expectations with our 1st six weeks trading 36% ahead of the same period last year. Our key brands are continuing to enjoy organic growth and a strong pipeline of new products to deliver additional opportunities. The Company has initiated a New Product Development process to help identify new categories in which it believes it can compete and add value. Four sectors have been identified as having potential and initial discussions with key retailers have produced enthusiastic responses to partner with us. The gestation period is necessarily elongated but we are committed to continuing to be a brand incubator driven by innovation.
We have an exciting and innovative life sciences portfolio which is in early stages of revenue generation but we expect it to make a positive contribution to the Group's performance this year. In summary, the outlook for the Company is underpinned by commercial opportunities already secured and deep and strong relationships with its domestic retail partners and international distributors. This provides confidence in the short to medium term but also the longer term as we continue to deploy new product development within existing brands but also for new brands and categories currently in development. We anticipate a strong trading performance in the next four months as we get access to approximately 2,000 stores from mid-March - three times larger than last year. In addition, we have the benefit of a revitalised DTC platform and strong growth from Roots and Charles + Lee. We look forward to a record second half.
Haris Chaudhry Executive Chairman
Finance Director's Review
Overview
The Group has reported a marginal decline in revenues due to changes in the DTC selling environment which impacted Skinny Tan in the UK. This was offset by Skinny Tan and Roots in retail which have performed well in the UK high street markets, despite an overall challenging retail environment. Group revenues declined 7.4% % to £3.9m (HY2017: £4.2m). The Company generated a loss before tax of £0.42m (HY2017: £0.03m).
Operating Results
Group gross margins were much improved over the period at 58.3% (HY2017: 53.3%) with the benefits of a larger retail network and diversity in product offerings. No major product launches took place in the period which has helped contribute to a more consistent product and margin mix amongst the brands.
Overall marketing expenditure was £1.1m, a significant increase to the previous period (FY2017: £0.7m). Significant investment was made on various social media platforms to drive sales whilst the change in sales generating algorithms by providers were altered to the detriment of the supplier. This resulted in higher marketing expense ratio to sales. Specific and identifiable expenditure was incurred on developing our on-line customer list, which grew by in excess of 10%. In line with the policy of recognising this asset and as in our full year 2018 accounts, the expenditure relating to the growth of our customer list was recognised as an intangible asset. This focused investment has driven the growth in DTC activity over the year and is an integral platform for future growth.
The Company incurred further expenditure on product development initiatives which will support sales in H2 with Boots and Superdrug. This was expensed during the period.
The Group has controlled wage and salary costs whilst ensuring organisational capability is enhanced. Administration expenses increased on the previous year primarily due to a slightly higher depreciation charge, higher merchant service charges and establishing the Australian Melbourne office whist in the process of closing the Sydney Office.
Taxation
The Group has used the reported results to estimate the tax expense which has been reflected in the Consolidated Statement of Profit and Loss. The Group carries a Deferred Tax asset which has been calculated to reflect movements in the income tax expense.
Cash and net debt
The Group carried a cash balance of £0.7m at the end of the reported period as against an opening balance as at the 1 July 2018 of £1.9m. Funds have been deployed in the continued building of the customer list and on-line marketing spend. The Company also acquired a further 1% of the Skinny Tan subsidiary from the founder during the period. The Company expects a profitable and cash generative second half with discussions already underway with a major financial institution to provide global banking services and financing should funds be required to support incremental growth opportunities.
The Group carries no external debt.
Dividends
The Board has elected not to declare a dividend at this time.
Responsibility statement
The names and functions of the Directors of the Company are as follows:
Haris Chaudhry Executive Chairman Joseph Bayer Executive Director Kieran Callan Chief Executive Officer Rodney Turner Non-executive Director Ross Andrews Non-executive Director
The Board confirms that to the best of its knowledge the condensed set of financial statements gives a true and fair view of the assets and liabilities, financial position and profit of the Group and has been prepared in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by the Disclosure and Transparency Rules as issued by the Financial Conduct Authority, namely: · DTR 4.2.7: An indication of important events that have occurred during the first six months of the financial year, and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year. · DTR 4.2.8: Details of related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the enterprise during that period. Together with any changes in the related parties' transactions described in the last annual report that could have a material effect on the enterprise in the first six months of the current financial year. By order of the Board
Joe Bayer Executive / Finance Director 20th February 2019
Principal risks and uncertainties
Risks
The Board regularly monitors exposure to key risks, such as those related to manufacturing of the product, cash position and competitive position relating to sales. It has also taken account of the economic situation over the past 12 months, and the impact that has had on costs and consumer purchases. In addition, with the uncertainty surrounding Brexit, the company has maintained a close brief on developments. The management believes that any impact on the company of Brexit is limited due to the small revenue base in Europe and manufacturing domiciled in the UK.
The principal risks the Company faces relate to a) the regulatory requirements in each country to which it exports and b) cash flow. If those regulations change, the Company will need to quickly adapt its strategy to ensure compliance and facilitate continuing sales. At this stage, because our key markets of Australia, US and the UK operate very stringent policies on all products, the Company does not view this as very likely to occur but have nonetheless recognized the potential risk.
Cashflow is another principal risk as, while the Company is in its growth phase, working capital is under demand to fund the purchase and manufacture of stock in concert with trading terms to retail buyers. The Group has alleviated this risk with recent capital raisings and stands well prepared to meet the requirements of its growth plans.
Capital structure
As at the 31 December 2018, the ordinary share capital of InnovaDerma PLC consisted of 14,496,633 shares, with a nominal value of EUR0.10 each. During the reported period the Group acquired a holding of 1% of the shares of its subsidiary Skinny Tan Pty Ltd from a founding shareholder. This takes the holding in that entity from 93% to 94%.
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE 6 MONTHS YEAR ENDED 31st DECEMBER 2018 - Unaudited
Earnings per share
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2018 - Unaudited
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| Half Year ended 30 December 2018 | Half Year ended 30 December 2017 |
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Cash flows from operating activities |
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Receipts from customers | 4,130,514 | 5,044,414 |
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Payments to suppliers and employees | (4,780,667) | (6,863,517) |
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Taxes Paid | (116,302) | (213,785) |
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Net cash used by operating activities | (766,455) | (2,032,888) |
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Cash flows from investing activities |
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Purchase of property, plant and equipment | (22,811) | (11,509) |
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Payments for product development | 0 | (51,814) |
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Payments for Intangibles | (444,575) | 0 |
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Net cash paid on acquisition of subsidiaries | (73,173) | (105,878) |
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Net cash used by investment activities | (540,558) | (169,201) |
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Cash flows from financing activities |
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Proceeds from issue of shares | 132,000 | 4,454,860 |
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Repayments of borrowings | 0 | (61,178) |
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Payments for convertible notes | 0 | 0 |
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Transaction costs for shares issued | (50,535) | (518,254) |
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Net cash from financing activities | 81,465 | 3,875,428 |
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Increase in cash and cash equivalents | (1,225,548) | 1,673,339 |
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Cash and cash equivalents at the beginning of the period | 1,906,215 | 1,906,215 |
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Effect of movement in foreign exchange rates | 21,367 | 168,439 |
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Cash and cash equivalents at the end of the period | 702,034 | 3,747,992 |
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Notes to the unaudited interim financial report
1. Basis of preparation
The interim financial statements for the six months ended 31 December 2017 and 31 December 2018 and for the twelve months ended 30 June 2018 do not constitute statutory accounts for the purposes of Section 434 of the Companies Act 2006. The Annual Report and Financial Statements for the year ended 30 June 2018 have been filed with the Registrar of Companies. The Independent Auditors' Report on the Annual Report and Financial Statements for the year ended 30 June 2018 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under sections 498(2) or 498(3) of the Companies Act 2006. The 31 December 2018 statements were approved by the Board of Directors on 20th February 2019. This unaudited interim report has not been audited or reviewed by auditors pursuant to the Financial Reporting Council guidance on Review of Interim Financial Information.
The condensed financial statements in this Interim Report have been prepared in accordance with the requirements of IAS 34 'Interim Financial Reporting' as adopted by the European Union.
As required by the Disclosure and Transparency Rules of the UK's Financial Conduct Authority, the condensed set of financial statements has been prepared by applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated financial statements for the year ended 30th June 2018, which were prepared in accordance with International Financial Reporting Standards as adopted by the European Union.
The condensed interim financial statements for the six months ended 31 December 2018 and the comparative figures for the six months ended 31 December 2017 are unaudited. The figures for the year ended 30 June 2018 have been extracted from the Annual Report on which the Auditors issued an unqualified audit report and which have been filed with the Registrar of Companies.
2. Earnings per share
The calculation of the basic and diluted earnings per share is based on the following data:
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| Six months ended 31 December | Year ended 30 June | |
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| 2018 (Unaudited) | 2017 (Unaudited) | 2018 (Audited) |
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| £000 | £000 | £000 |
Earnings |
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Net profit from continuing operations before tax attributable to the equity holders of the parent company |
| (317) | (62) | 291 |
3. Related party transactions
Name | Transaction | Amount received from/ | Amount due from/(to) |
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(paid to) for the Half Year ended December
| as at 31 as at 30 December June
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| £ | £ | £ | £ | |
Zaymar Investments Pty Ltd | Loan payable1 | (13,186) | (90,511) | 0 | (13,186) |
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Mr Haris Chaudhry | Loan payable1 | 0 | 403 | 1,552 | 1,552 |
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1 These loans are interest free and unsecured.
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Nature of related parties
Zaymar Investments is a related party of Mr Haris Chaudhry, the Executive Chairman.
This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and operating margins, market trends and our product pipeline are forward-looking statements. Phrases such as "aim", "plan", "intend", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. Any forward-looking statement is based on information available to InnovaDerma as of the date of the statement. All written or oral forward-looking statements attributable to InnovaDerma are qualified by this caution. InnovaDerma does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances.